Publications

Working Papers

The objective of the Working Papers series is to disseminate original research studies on economics and finance, which since 2003 have been reviewed on an anonymous basis. Through their publication, the Banco de España hopes to contribute to the economic analysis and knowledge of the Spanish economy and its international context.

The opinions and analyses published in the Working Papers series are the responsibility of the authors and are not necessarily shared by the Banco de España or the Eurosystem.

All documents published in this collection are available in electronic format. If they are not directly available through this website, copies can be requested from the Publications Unit.

Housing prices diverge from construction prices after 1997 in four major countries. Besides, TFP differences between construction and the general economy account for the evolution of construction prices in the U.S. and Germany, but not in the U.K. and Spain.

We study the dynamics of a Lucas-tree model with finitely lived agents who "learn from experience". Individuals update expectations by Bayesian learning based on observations from their own lifetimes. In this model, the stock price exhibits stochastic boom-and-bust fluctuations around the rational expectations equilibrium. This heterogeneous-agents economy can be approximated by a representative-agent model with constant-gain learning, where the gain parameter is related to the survival rate.

We compare labor market outcomes under firm-level and sector-level bargaining in a onesector Mortensen-Pissarides economy with firm-specific productivity shocks. Our main theoretical results are twofold. First, unemployment is lower under firm-level bargaining Second, introducing efficient opting-out of sector-level agreements suffices to bring unemployment down to its level under decentralized bargaining. For an archetypical contintental European calibration, we find that the unemployment rate is about 5 percentage points lower under firm-level bargaining or efficient opting out than under sector-level bargaining.

We study optimal monetary policy from the timeless perspective in a general statedependent pricing framework. Firms are monopolistic competitors and are subject to idiosyncratic menu cost shocks. We find that, under isoelastic preferences and no government spending, strict price stability is optimal both in the long run and in response to aggregate shocks. Key to this finding is an "envelope" property: at zero inflation, a marginal increase in the rate of inflation has no effect on firms’ profits and therefore has no effect on the rate of price adjustment. We offer an analytic solution which does not rely on local approximation or efficiency of the steady-state.

The co-movements of labor productivity with output, total hours, vacancies and unemployment have changed since the mid 1980s. This paper offers an explanation for the sharp break in the fluctuations of labor market variables based on endogenous labor supply decisions following the mortgage market deregulation. Our exercise shows that the dynamic pattern of the labor market variables might have been substantially affected by the increase in household leverage in the US in the last twenty years. We set up a search model with efficient bargaining and financial frictions, in which impatient borrowers can take an amount of credit that cannot exceed a proportion of the expected value of their real estate holdings. When borrowers’ equity requirements are low, the impact of a positive technology shock on the marginal utility of consumption is strengthened, which in turn results in lower hours per worker and higher wages in the bargaining process. This shift in labor supply discourages firms from opening vacancies, reducing the impact of the shock on employment.

This article studies how the managers of a regulated firm can use debt and equity contracts to constrain the regulator’s policy through the contingent transfer of control to external investors with high relative liquidation value. External finance increases regulated income and facilitates investment, but managers generally choose socially excessive levels of outside funds. If bankruptcy law favors reorganization over liquidation, the managers’s value of debt for a given investment level decreases. In the presence of income risk, regulatory ex ante commitment can increase the firm’s value if the regulator’s preference for continuation is high relative to that of managers.

The evolution of Regional and Local governments’ spending in Spain is currently under close scrutiny by national and international investors and analysts, international organizations and rating agencies. Indeed, some 50% of general government spending and some 70% of public employment are managed by Regions and Municipalities, which consequently have to bear a great portion of the overall fiscal consolidation plan currently under way. Despite recent efforts of the Spanish government at increasing transparency, the significant shortages of the existing data render the task of monitoring regional and local governments’ public spending in real-time a complicated endeavor. Within this framework, we exploit all available short-term information on sub-national governments’ spending from scattered sources, and fi nd a subset of indicators usable for real-time policy analysis. In particular: (i) we compile a dataset on quarterly and monthly regional government’s spending variables, by reviewing all available, scattered sources, and put together a database usable for economic and policy analysis; (ii) we exploit the compiled information, and other additional sources, by fitting time-series mixed-frequencies models to the data, and show the forecasting and monitoring capabilities of the selected short-term fiscal indicators; (iii) we show that official annual budgetary targets do present a reasonable forecasting performance when used as indicators of regional and local spending targets in national accounts terms, in particular when used in combination with time series indicators.

We study the optimal joint design of prudential supervision and deposit guarantee regulations in a multi-country, integrated banking market, where policy-makers have preferences regarding profitability and stability of the banking sector. Non-coordinated policies will tend to yield too little supervision and too much deposit insurance. The paper concludes with recommendations on policy priorities in this area.

We present a general equilibrium model of the global oil market, in which the oil price, oil production, and consumption, are jointly determined as outcomes of the optimizing decisions of oil importers and oil exporters. On the supply side the oil market is modelled as a dominant firm - Saudi Aramco - with competitive fringe. We establish that a dominant firm may exist as long as it enjoys a cost advantage over the fringe. We provide an expression for the optimal markup and compute the spare capacity maintained by such a firm. The model produces plausible dynamics in response to oil supply and oil demand shocks. In particular, it reproduces successfully the jump in oil output of Saudi Aramco following the output collapse of Iraq and Kuwait during the first Gulf War, explaining it as the profitmaximizing response of the dominant firm. Oil taxes and subsidies affect the oil price and welfare through their effect on the trade-off between oil production efficiency and oil market competition.

While banks may change their credit supply due to bank balance-sheet shocks (the local lending channel), firms can react by adjusting their sources of financing in equilibrium (the aggregate lending channel). We provide a methodology to identify the aggregate (firm-level) effects of the lending channel and estimate the impact of banks’ ability to securitize realestate assets on credit supply for non real-estate firms in Spain over 2000-2010. We show that firm-level equilibrium dynamics nullify the strong local (bank-level) lending channel of securitization on credit quantity for firms with multiple banking relationships. Credit terms however become softer, but there are no real effects. Securitization implies a credit expansion on the extensive margin towards first-time bank clients, which are more likely to default. Finally, the 2008 securitization collapse reverses the local lending channel.

Model uncertainty remains a challenge to applied researchers in economics. When many competing models are available for estimation and without enough guidance from theory, model averaging represents an alternative to model selection. Despite model averaging approaches have been present in statistics for many years, only over the recent decades are starting to receive attention in economic applications. This paper presents an overview of model averaging in economics with emphasis and some insights on recent developments in the combination of model averaging with IV and panel data settings.

This paper proposes two models in which price stickiness arises endogenously even though firms are free to change their prices at zero physical cost. Firms are subject to idiosyncratic and aggregate shocks, and they also face a risk of making errors when they set their prices. In our first specification, firms are assumed to play a dynamic logit equilibrium, which implies that big mistakes are less likely than small ones. The second specification derives logit behavior from an assumption that precision is costly. The empirical implications of the two versions of our model are very similar. Since firms making sufficiently large errors choose to adjust, both versions generate a strong "selection effect" in response to a nominal shock that eliminates most of the monetary nonneutrality found in the Calvo model. Thus the model implies that money shocks have little impact on the real economy, as in Golosov and Lucas (2007), but fits microdata better than their specification.

Published in: Journal of Economic Dynamics and Control 58, September 2015, pp. 218-234.

We analyse the impact of fiscal shocks on the Spanish effective exchange rate over the period 1981-2008 using a standard structural VAR framework. We show that government spending brings about positive output responses, jointly with real appreciation. Such real appreciation is explained by persistent nominal appreciation and higher relative prices. Our results indicate that the adoption of the common currency has not implied any significant change in the way fiscal shocks affect external competitiveness through their effect on relative prices. In turn, the current account deteriorates when government spending rises mainly due to the fall of exports caused by the real appreciation. Accordingly, our results in this regard are largely consistent not only with the conventional Mundell-Fleming model and, in general a traditional Keynesian view, but also with a wide set of RBC or New Keynesian models under standard calibrations. Moreover, our estimations are fully in line with the "twin deficits" hypothesis. Furthermore, we show that shocks to purchases of goods and services and public investment lead to real appreciation, whereas the opposite happens with higher personnel expenditure. We obtain output multipliers around 0.5 on impact and slightly above unity one year after the shock, which are in line with previous empirical evidence regarding some individual European countries.

Despite a rapid decrease in unemployment and strong GDP and employment growth, real wages barely increased in Spain over the period 1995-2006. An explanation of this lack of growth may rely on employment composition effects derived from structural changes, such as the rise in the weights of employment in the construction and services sectors, the increase in female employment participation, and the arrival of large immigration inflows. Using data from three waves of the Structure of Earnings Survey, we break down observed wage changes into those due to varying worker and job characteristics and variations of the returns to those characteristics. Quantile regressions are used to estimate wage equations at different percentiles and to construct the counterfactual wage distributions that would have been observed had individual and job characteristics remain constant over time. Our main finding is that the lack of growth of Spanish real wages over the period 1995-2006 is mainly due to the decrease of returns to characteristics, specially education and labour market experience, which is more noticeable at the upper deciles of the wage distribution, and not to changes in employment composition, which when taken over a wide set of worker and job characteristics, had positive effects on wages.

This paper analyzes the Spanish monetary system from 1856, when the Bank of Spain was created, to 1874, when it was awarded the monopoly of emission. This period was characterized by the emergence of an unregulated banking system, with multiple banks of issue entitled to emit bank notes. We focus on two main issues: i) the large fluctuations in the money supply during this period; and ii) the lack of a lender of last resort in the banking panic of 1866. To analyze this, we construct a new dataset on money supply aggregates. The paper also estimates the economic impact of monetary fluctuations with the help of a calibrated new Keynesian model. Our results suggest that money supply shocks had a milder effect on inflation and output than the one predicted by the theory.

Spanish banks had to set aside a countercyclical loan loss provision during the period 2000-2004. The amount of such provision as well as the allowance accumulated had to be disclosed by banks. The former creates a natural experiment to test whether banks smooth earnings to mislead investors and other interested parties, or, by contrast, income smoothing is used to avoid the existence of market frictions. Using panel data econometric techniques, we find evidence of income smoothing through loan loss provisions during the period previous to the implementation of the countercyclical provision (1988-1999). However, during 2000-2004, banks relied only on the newly created countercyclical provision to smooth income. This change in behaviour suggests that there may be efficiency gains in reducing the volatility of accounting earnings over time.

Using multiple births as an Instrumental Variable (IV) for family size and data for 43 developing countries, I find evidence that a shock in fertility has a cost for a family as a whole. Mothers are more likely to live under less stable family arrangements and they are more likely to use contraceptives. Children are less likely to receive some vaccines, attend school, live their mother and there is an increase in odds of mortality. The analysis by level of development reveals the cost of fertility comes from those countries with lower level of development.

The recent economic crisis has altered the dynamics of economic series and, as a consequence, introduced uncertainty in seasonal adjustment of recent years. This problem was discussed in recent workshops at the European Central Bank and at Eurostat in the context of adjustment of the Euro Area Industrial Production (EPI) series. Because a seasonal component is unobserved and undefined, it is difficult to compare results from different adjustment methods. Within the regARIMA model-based approach, however, a framework for systematic analysis and comparison of results is indeed present. The EPI series is analyzed under the TRAMO-SEATS framework. The purpose of the analysis is not to compare alternative methods, but to show how the results of the model-based analysis can be exploited at the identification, diagnostics, and inference stages of modeling, and in the selection of an appropiate seasonal adjustment (and underlying model). Despite the uncertainty induced by the crisis (and the revisions to the unadjusted data), the automatic procedure, with ramps to capture the spectacular 2008 drop in the series, provides excellent and stable results.

It is well-known in the literature that income per capita is strongly correlated with the level of democracy across countries. In an influential paper, Acemoglu et al. (2008) find that this linear correlation disappears once they control for country-specific effects focusing on within-country variation. In this paper we find evidence of a non-linear effect from income to democracy even after controlling for country-specific effects. While a positive effect emerges for poor countries, this effect vanishes for rich countries.

In this paper we consider estimation of nonlinear panel data models that include multiple individual fixed effects. Estimation of these models is complicated both by the difficulty of estimating models with possibly thousands of coefficients and also by the incidental parameters problem; that is, noisy estimates of the fixed effects when the time dimension is short contaminate the estimates of the common parameters due to the nonlinearity of the problem. We propose a simple variation of existing bias-corrected estimators, which can exploit the additivity of the effects for numerical optimization. We exhibit the performance of the estimators in simulations.

We propose an econometric analysis of the evolution of bank credit to the private sector in order to describe credit cycles and identify phases of particularly low (or negative) credit growth such as those that typically accompany financial or banking crises. We use a sample of twelve developed countries, which improves the reliability of our estimation results and provides a global view of the situation of credit for developed countries. In our preferred specification, the credit cycle is characterized as a three-state Markov-switching model that identifies episodes of credit expansion, intermediate credit growth and subpar growth or credit crisis. This specification identifies six of the countries as having experienced period of credit adjustment after the beginning of the financial crisis in 2007 (Canada, Germany, Netherlands, Spain, Switzerland and US). By the end of the sample period, credit growth was still impaired in three of these countries (Germany and Spain in 2010:I; and United States in 2009:IV). The analysis also uncovers a systematic cyclical pattern in the bank lending sector of the group of advanced countries considered in our sample, which have experienced five episodes of synchronous restrictions in bank lending: 1974-75, 1980-82, 1991-93, 2001-02 and from 2008 to the end of the sample.

Reversals in capital inflows can have severe economic consequences. This paper develops a dynamic general equilibrium model to analyse the effect on interest rates, asset prices, investment, consumption, output, the exchange rate and the current account of a shift in portfolio preferences of foreign investors. The model has two countries and two asset classes (equities and bonds). It is characterised by imperfect substitutability between assets and allows for endogenous adjustment in interest rates and asset prices. Therefore, it accounts for capital gains arising from equity price movements, in addition to valuation effects caused by changes in the exchange rate. To illustrate the mechanics of the model, we calibrate it to analyse the consequences of an increase in the importance of sovereign wealth funds (SWFs). Specifically, we ask what would happen if ‘excess’ reserves held by emerging markets were transferred from central banks to SWFs. We look separately at two diversification paths: one in which SWFs keep the same allocation across bonds and equities as central banks, but move away from dollar assets (path 1); and another in which they choose the same currency composition as central banks, but shift from US bonds to US equities (path 2). In path 1, the dollar depreciates and US net debt falls on impact and increases in the long run. In path 2, the dollar depreciates and US net debt increases in the long run. In both cases, there is a reduction in the ‘exorbitant privilege’, ie, the excess return the United States receives on its assets over what it pays on its liabilities. The model is applicable to other episodes in which foreign investors change the composition of their portfolios.

We analyze the impact of high frequency trading in financial markets based on a model with three types of traders: liquidity traders, market makers, and high frequency traders. Our four main findings are: i) The price impact of the liquidity trades is higher in the presence of the high frequency trader and is increasing with the size of the trade. In particular, we show that the high frequency trader reduces (increases) the prices that liquidity traders receive when selling (buying) their equity holdings. ii) Although market makers also lose revenue to the high frequency trader in every trade, they are compensated for these losses by a higher liquidity discount. iii) High frequency trading increases the volatility of prices. iv) The volume of trades doubles as the high frequency trader intermediates all trades between the liquidity traders and market makers. This additional volume is a consequence of trades which are carefully tailored for surplus extraction and are neither driven by fundamentals nor is it noise trading. In equilibrium, high frequency trading and traditional market making coexist as competition drives down the profits for new high frequency traders while the presence of high frequency traders does not drive out traditional market makers.

This paper develops a medium-scale dynamic, stochastic, general equilibrium (DSGE) model for fiscal policy simulations. Relative to existing models of this type, our model incorporates two important features. First, we consider a two-country monetary union structure, which makes it well suited to simulate fiscal measures by relatively large countries in a currency area. Second, we provide a notable degree of disaggregation on the government expenditures side, by explicitly distinguishing between (productivity-enhancing) public investment, public purchases and the public sector wage bill. In addition, we consider a labor market characterized by search and matching frictions, which allows to analyze the response of equilibrium unemployment to fiscal measures. In order to illustrate some of its applications, and motivated by recent policy debate in the Euro Area, we calibrate the model to Spain and the rest of the area and simulate a number of fiscal consolidation scenarios. We find that, in terms of output and employment losses, fiscal consolidation is the least damaging when achieved by reducing the public sector wage bill, whereas it is most damaging when carried out by cutting public investment.

This paper discusses likelihood-based estimation of linear panel data models with general predetermined variables and individual-specific effects. The resulting (pseudo) maximum likelihood estimator is asymptotically equivalent to standard GMM but tends to have smaller finite-sample biases as illustrated in simulation experiments. Moreover, the availability of such a likelihood function allows applying the Bayesian apparatus to this class of panel data models. Combining the aforementioned estimator with Bayesian model averaging methods we estimate empirical growth models simultaneously considering endogenous regressors and model uncertainty. Empirical results indicate that only the investment ratio seems to robustly cause long-run economic growth. Moreover, the estimated rate of convergence is not significantly different from zero.

One of the most salient feature of the Spanish housing market, compared to other European economies, is its relatively low rental share. This may be partly attributed to the existence of fiscal distortions in Spain favoring ownership. In this paper, we simulate the potential efects of different policy measures aimed at homogenizing the fiscal treatment of ownership and renting and improving the efficiency of the rental market. We do so in the context of a DSGE model featuring a market for owner-occupied and rented housing, as well as collateral constraints in loan markets. We find that eliminating the existing subsidy to house purchases, introducing a comparable subsidy to rental payments or increasing the efficiency in the production of housing rental services raise the rental share by a similar amount. However, their implications in terms of the construction sector differ.

This paper builds a large overlapping generations model of a small open economy featuring imperfect competition in the labor and product markets to understand i) which were the main determinants of the large expansionary phase experienced in Spain from the mid-1990s until the arrival of the global financial crisis in 2007-2008, ii) what role fiscal policy and structural reforms could have played to avoid the build-up of large external imbalance over this period, and iii) how these policies could affect the recovery of economic activity in Spain after the crisis. Our results indicate that falling interest rates and demographic changes were the main drivers of the Spanish expansionary phase. As for the macroeconomic behavior of the Spanish economy after the crisis, our results suggest that a front-loading in fiscal consolidation together with structural reforms that eliminate distortions in the goods and labor markets could make the recovery of economic activity in Spain more successful.

Public deficit figures are subject to revisions, as most macroeconomic aggregates are. Nevertheless, in the case of Europe, the latter could be particularly worrisome given the role of fiscal data in the functioning of EU’s multilateral surveillance rules. Adherence to such rules is judged upon initial releases of data, in the framework of the so-called Excessive Deficit Procedure (EDP) Notifications. In addition, the lack of reliability of fiscal data may hinder the credibility of fiscal consolidation plans. In this paper we document the empirical properties of revisions to annual government deficit figures in Europe by exploiting the information contained in a pool of real-time vintages of data pertaining to fifteen EU countries over the period 1995-2008. We build up such real-time dataset from official publications. Our main findings are as follows: (i) preliminary deficit data releases are biased and non-efficient predictors of subsequent releases, with later vintages of data tending to show larger deficits on average; (ii) such systematic bias in deficit revisions is a general feature of the sample, and cannot solely be attributed to the behaviour of a small number of countries, even though the Greek case is clearly an outlier; (iii) Methodological improvements and clarifications stemming from Eurostat’s decisions that may lead to data revisions explain a significant share of the bias, providing some evidence of window dressing on the side of individual countries; (iv) expected real GDP growth, political cycles and the strength of fiscal rules also contribute to explain revision patterns; (v) nevertheless, if the systematic bias is excluded, revisions can be considered rational after two years.

Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of "strict IT", which imply a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with FX interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, FX interventions in some IT countries have been more effective to lower volatility than in non-IT countries, which may justify the use of "flexible IT" by policymakers.

Total Factor Productivity (TFP) accounts for a sizeable proportion of the income and growth differences across countries. Two challenges remain to researchers aiming to explain these differences: on the one hand, TFP growth is hard to measure; on the other hand, model uncertainty hampers consensus on its key determinants. This paper combines a non-parametric measure of TFP growth with model averaging techniques to addess both issues. The empirical findings suggest that the most robust TFP growth determinants are unobserved heterogeneity, initial GDP, consumption share, and trade openness. We also investigate the main determinants of the TFP components: efficiency change (i.e. catching up) and technological progress (i.e. innovation).

This paper offers an evaluation of the output contribution of infrastructure. Drawing from a large data set of infrastructure stocks covering 88 countries and spanning the years 1960-2000, and using a panel time-series approach, the paper estimates a long-run aggregate production function relating GDP to human capital, physical capital, and a synthetic measure of infrastructure given by the first principal component of infrastructure endowments in transport, power and telecommunications. Tests of the cointegration rank allowing it to vary across countries reveal a common rank with a single cointegrating vector, which we interpret as the long-run production function. Estimation of its parameters is performed using the pooled mean group (PMG) estimator, which allows for unrestricted short-run parameter heterogeneity across countries while imposing the (testable) restriction of long-run parameter homogeneity. The long-run elasticity of output with respect to the synthetic infrastructure index ranges between 0.07 and 0.10. The estimates are highly significant, both statistically and economically, and robust to alternative dynamic specifications and infrastructure measures. There is little evidence of long-run parameter heterogeneity across countries, whether heterogeneity is unconditional, or conditional on their level of development, population size, or infrastructure endowments.

There is evidence in the literature of fiscal consolidation episodes producing (non-Keynesian) expansionary effects (e.g. Alesina and Ardagna, 1998). We replicate this result for a panel of OECD countries under exogeneity of the fiscal tightening decision, and provide evidence that this decision is endogenous to GDP so that the exogeneity assumption might be inappropriate. Once this endogeneity is taken into consideration, we find that fiscal consolidations have a negative impact on GDP as expected in a Keynesian framework. We also investigate the determinants of successful consolidations. In particular, we use model averaging to overcome the problem of model uncertainty, and conclude that economic recovery and cuts in public wages are the most important ingredients of a consolidation program for successfully reducing budget defi cits.

Economic theory predicts that the consumption path of unconstrained homeowners responds to the interest rate, while the consumption path of credit constrained homeowners is determined by the size and timing of payments (mortgage maturity). We exploit the rapid expansion of mortgage markets during the last decade in Spain and a very detailed survey on household fi nances to estimate group-specific consumption responses to changes in the credit conditions. Our estimates suggest that the consumption of households headed by an individual with high school responds more to mortgage maturity than to the interest rate spread. The consumption of the rest of indebted households is insensitive to loan maturity. Those results are confirmed when we instrument loan maturity exploiting the fact that banks are reluctant to offer contracts with age at maturity above 65. An interpretation of those results is that households headed by middle education individuals, 8% of our sample, behave as credit constrained.